Asian shares rose to a one-month high and the euro clung near its strongest in a week on Friday as strong demand for Spanish and Italian debt sales tempered risk aversion ahead of another auction from Rome later in the day.
Interbank lending rates fell in a sign that worries about a credit crunch may be easing, while Asian credit markets firmed, with primary market activity picking up.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.6 percent to its highest since December 8. Japan's Nikkei average <.N225> extended gains to climb 1.4 percent, drawing strength from U.S. stocks which closed at a five-month high for a third day on Thursday. <.T>
The euro was nearly flat at $1.2818, not far from a one-week high of $1.2846 hit on Thursday.
In a closely watched test of investor confidence, Spain sold double the targeted amount at its auction of a new three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian T-bill sale on Thursday.
The successful sales raised hopes for a similarly positive result when Italy sells up to 4.75 billion euros of longer-dated bonds later on Friday.
The European Central Bank, which kept interest rates unchanged at a record low 1 percent on Thursday as expected, lent support as President Mario Draghi said that, while the bank's massive injection of euros into the euro zone banking system in December had helped avoid a credit crunch, there was still scope for further interest rates cuts.
Market risk appetite continues to be stable despite the more mixed news that has emerged over the past 24 hours, largely owing to the ECB and the auctions, analysts at Barclays Capital said in a research note.
Positive news from the ECB, the auctions and moderating inflation in China, raising the prospect of policy easing to support growth, were met, however, with worries about talks breaking down on a second bailout for deeply debt-ridden Greece and weaker U.S. economic data that reminded investors of the fragility of the U.S. recovery.
Contrarian sentiment indicators suggest that investor optimism may have reached stretched levels and be more vulnerable to negative headline news in the near-term, the Barclays analysts said.
Greece's prime minister held crunch talks on Thursday with the head of a group representing private sector banks who have warned that time is running short to clinch a deal on a voluntary debt exchange for Greece.
Euro zone sources said Athens might force reluctant investors to accept losses.
Data on Thursday showed euro zone industrial output fell in November on weakening consumer spending capability, pointing to a mild recession.
In the United States, retail sales rose at the weakest pace in seven months in December and first-time claims for jobless benefits moved higher last week.
Interbank lending costs fell on Thursday on as the successful debt auctions eased fears of an impending meltdown in the financial system, and there were signs that the ample liquidity and low rates are encouraging issuers to tap markets.
Issuance of covered bonds, which are backed by assets that would be used to repay holders if a bank defaults, has risen in Europe in early 2012, with more than a dozen deals lifting optimism that the asset class will help banks meet their record 2012 funding needs.
In Asia, Australian banks NAB and ANZ launched 5-year samurais totalling 83.5 billion yen and 85.0 billion yen respectively on Thursday, much larger than the 70 billion yen planned for both. Samurai bonds are yen bonds issued in Japan by non-Japanese entities.
Spreads on the iTraxx Asia ex-Japan investment grade index narrowed by a couple of basis points early on Friday.
Spot gold was steady just below $1,650 an ounce, while U.S. crude futures were also steady below $100 per barrel, after a sell-off in the previous session on a report that a proposed European Union embargo on imports of Iranian crude would be phased in over six months.
(Editing by Alex Richardson)